E-commerce patent battles:Are the scales starting to tip back?

E-retailers face a deluge of patent lawsuits, but a new law and recent decisions put them in a stronger position to defend themselves.

His phone rings several times a week with requests for help—more often now than just six months ago.

The calls come from e-retailers who consider Lee Cheng, general counsel for online retailer Newegg Inc., almost as a resistance hero. That's because Newegg continues to wage the rare public war against infringement suits filed by holders of patents for site search, navigation, product recommendation and other e-commerce functions. And the retailer, along with fellow e-retailer Overstock.com Inc., last fall won a major infringement suit that, patent experts say, offers some hope to other web merchants that face costly licensing or damage claims.

The retailers seek advice and help from Cheng, and he says he provides what the law allows: documents, names of experts, guidance on how to mount a defense using relatively low-priced legal help. "The more expertise we have, the more we will share," he says. "We are very happy to discuss how we can work together more efficiently."

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On the one hand, the increasing frequency of those calls show the widespread panic—and it is panic, going by the private comments of e-retailers targeted by patent holders—caused by infringement claims and their five-, six-, and seven-figure settlement demands. On the other hand, those calls suggest more e-retailers may be inclined to fight the infringement actions from such patent holders as Kelora Systems LLC and Select Retrieval LLC, to name two of the plaintiffs familiar to web merchants. "It is the better of times, it is the worst of times," Cheng says, with apologies to Dickens.

Few online retailers escape the attention of patent holders—often denounced by merchants as "patent trolls"—that in many cases are basing their claims on patents issued during the early years of the Internet, in the 1990s. Those patents may have passed, via merger, acquisition or outright sale, through the hands of several enterprises since then, often ending up with companies that have no greater purpose than to collect patent licensing fees.

The good news is that retailers may have gained some relief with the enactment last fall of the Leahy-Smith America Invents Act, the first major patent reform law in some 50 years. As well, legal experts say, judges are becoming more sophisticated about technology, and defendants have prevailed in some recent cases, factors that should help retailers defend against infringement claims.

But the bad news is, indeed, pretty bad. The number of infringement cases filed by non-practicing entities—that's the nicer, if more clinical, term for "trolls," referring to the fact that such patent holders don't use their patented technology in their own business practices—and which involved e-commerce reached 325 last year, double the 163 cases in 2010, according to data from RPX Corp., which buys up patents to protect its clients from getting sued. The number of defendants in RPX-tracked infringement suits also increased, to 1,137 from 1,027. Costs to defend against the claims or to settle also have grown, to $1.9 billion last year from $1.56 billion in 2010, a 22% spike, according to RPX data.

A look at one e-commerce patent holder suggests the scope of the issue: Since September, Select Retrieval, whose patents cover site search, has sued about 100 retailers, including 75 merchants ranked in Internet Retailer's Top 500 Guide.

"Just getting one of these letters costs me up to $25,000 to have our attorney investigate the claim and respond, and we've been hit by 10 of these just in the last year," says one web merchant, who asked not to be identified. "Dealing with these threatening patent infringement letters is becoming one of my biggest cost centers."

That's a common migraine-level complaint among e-retailers. But the days ahead could be less painful.

A new law

One likely source of relief is the America Invents Act, which President Barack Obama signed into law Sept. 16 after the measure won solid bipartisan support in Congress, a noteworthy feat in this political climate. "There are two reasons this reform passed," says a spokeswoman for the American Intellectual Property Law Association. "First, the patent reform effort had been in Congress for more than six years. Second, I.P. issues have on the whole been bipartisan."

The heart of the act says that patents will go to the first party to file, not the first to invent. But the part that could help e-retailers is the joinder provision in Section 19 of the law. Plaintiffs in infringement cases generally no longer can sue multiple defendants in a single action—that is, the patent holders can no longer sue by shotgun blast. However, plaintiffs rushed to take advantage of the old rules right up to the end—on Sept. 15, there were 54 new infringement cases of all kinds filed across the country naming 804 defendants, according to the PriorSmart litigation tracking service. The spate of suits filed just before the law took effect could account for why many e-retailers feel they have been hit by more lawsuits in the past year.

Now that the America Invents Act is law, patent holders must generally sue by rifle shot—one defendant per action. That doesn't prevent them from filing multiple suits, but it does increase the paperwork and attorney time required, which forces patent holders to think harder about which companies are worth suing, attorneys say. "Some of the less well known players in the e-commerce space, or less significant targets, might be dropped by plaintiffs" as a result of the provision, says Thomas Duston, a partner in Chicago-based law firm Marshall, Gerstein & Borun who specializes in patent litigation. (For various technical reasons, the new patent law doesn't guarantee the end of multiparty lawsuits, but it will be more difficult to bring those types of suits.)

There is another provision in the new law that might help e-retailers. It makes it easier for defendants—that is, e-retailers—to file to transfer a case closer to their home offices or registered headquarters, which may be in a federal court district considered less favorable to patent holders.